Leading information technology companies in India have been overly generous towards investors in the last five years, returning about 70% of the profits earned by them to the shareholders.
Leading information technology companies in India have been overly generous towards investors in the last five years, returning about 70% of the profits earned by them to the shareholders. TCS, Infosys, HCL Tech, Wipro, and Tech Mahindra, the top five IT giants in India earned a total of Rs 3.3 lakh crore in profits between financial year 2016 and 2020, of this a massive Rs 2.3 lakh crore was paid to the shareholders, said brokerage and research firm Motilal Oswal. “The business models of large-cap Indian IT companies are typified by the combination of low to moderate growth and very high profit to cash conversion dynamics,” Motilal Oswal said. TCS led the tally, paying Rs 1.1 lakh crore to investors over the last 5 years.
With the large pay-outs, these leading IT firms have visibly spent less on acquisitions and have re-invested less in the existing businesses. Companies have used dividends, buybacks, and special dividends as instruments to return cash to shareholders. TCS has paid the most to investors in the last five years, followed by Infosys with a payout of Rs 65,000 crore, and Wipro at Rs 30,000 crore. HCL Technologies paid Rs 17,000 crore since the financial year 2016, while Tech Mahindra returned Rs 8,600 crore to investors.
Profits grew 5% annually but payouts jumped by 23%
In times when equity markets are dealing with volatility, investors hunt for companies with stable cash generation and healthy payout ratios and good ROEs. The payout trend among these IT firms has accelerated in recent years especially post-financial year 2017. The profit compound annual growth rate for these five companies has been clocked at 5% by Motilal Oswal, from a cumulative profit of Rs 57,000 crore in FY16 to Rs 74,000 crore in FY20. On the other hand the compound annual growth rate for the payout by these firms has been recorded at a massive 23%. A total of Rs 23,400 crore was paid out to investors in 2016; the amount increased to Rs 65,800 crore in the last fiscal year.
“Interestingly, none of these five companies have delivered a profit CAGR in the double digits over FY16–20. HCL Tech posted the highest 9% PAT CAGR over FY16–20, while Wipro had a relatively flattish 2% PAT CAGR over the similar period,” the report said. Although the earnings of these companies has been moderate, Motilal Oswa said the rising capital payout has helped in the re-rating of these large-cap IT firms. The forward P/E(x) increased to around 22x in Aug’19 from 16x in Mar’17 and is currently trading at around 20x. “Investors, in the absence of corporate earnings growth over the last five years, have gravitated toward the defensive sectors, which offer a combination of stable earnings visibility, strong balance sheets, high-quality management, and healthy RoE and payout ratios. The Technology sector has been a clear beneficiary of these,” the report said.